Who Will Manage Sanctioned Assets: Analysis of Draft Law

The Verkhovna Rada will consider a draft law on the transfer of confiscated assets of russian oligarchs and other sanctioned persons to the reorganized SPFU in the second reading.

In February 2023, the Parliament adopted draft law No.8250 on the optimization of the SPFU structure as a basis. This document provided for the transformation of the agency into an integral legal entity and a change in the procedure for appointing and dismissing its deputy heads.

The need for structural changes in the Fund coincided with the need to resolve the issue of managing confiscated russian assets. The law does not give a clear answer who exercises such powers on a permanent basis, but gives the government the opportunity to choose a temporary manager of such assets among state authorities.

Given that the government mainly entrusted the SPFU with the temporary management of the recovered assets — to meet the needs of the state, further privatization, or lease — MPs propose to assign these powers to the agency in draft law No.8250.

The comparative table was published after consideration of the draft by the specialized committee, which recommended the Verkhovna Rada adopting it in the second reading and in general. Let’s find out the features of these and other changes before the vote in the parliament hall. 

Current situation

Regarding the management of sanctioned assets

Currently, the decision of the High Anti-Corruption Court on the recovery of assets to the state on the day it enters into force is referred to the Cabinet of Ministers of Ukraine to determine the entity, procedure, and method of its enforcement.

The Cabinet of Ministers of Ukraine can entrust temporary management of these assets to the ARMA, the SPFU, military administrations, other state authorities and economic entities of the public sector of the economy.

However, the seizure, imposed in accordance with criminal procedural legislation, could be applied to certain assets recovered into state income in accordance with the Law of Ukraine “On Sanctions.” These assets could be transferred to the ARMA to implement measures for their management. That is, in order to sell such property within the framework of the sanctions legislation, it is necessary to resolve the issue of cancellation of seizure in criminal proceedings.

Regarding the management structure of the SPFU

The structure of the State Property Fund consists of a central office and 12 regional offices, which are separate legal entities. This status gives the regional offices of the SPFU powers in various fields of activity, in particular:

• to adopt decisions on privatization of state property;
• to manage the corporate rights of the state;
• to act as lessors of state property;
• to conclude contracts with heads of state-owned enterprises;
• to conclude and amend contracts.

Heads of regional offices are appointed in agreement with heads of local state administrations and dismissed by the Head of the Fund, which in fact does not comply with the legislation requirements on the organization of the activities of the central executive bodies of Ukraine.

Neither does the procedure for appointing and dismissing deputy heads of the SPFU comply with the Law “On Central Executive Bodies.” They are appointed on the proposal of the Prime Minister of Ukraine and dismissed by the President of Ukraine.

The procedure for appointing and dismissing the Head of the SPFU is also contradictory because it does not meet the requirements of Article 85 of the Constitution of Ukraine. Currently, the President does it with the approval of the Verkhovna Rada.

What will change?

In the management of sanctioned assets

The Law of Ukraine “On Sanctions” proposes to establish that the seizure of assets, the establishment of a moratorium on them, or any other encumbrances (prohibition to dispose of or use them), as well as pledging such assets, does not prevent the recovery of these assets into the state income as a sanction.

The decision of the High Anti-Corruption Court on the application of sanctions will be sent to the State Property Fund of Ukraine on the day it enters into force to determine the procedure and method of its enforcement. And the sanctioned assets will be transferred to the State Property Fund of Ukraine within five working days from the date of entry into force of the above court decision. 

The State Property Fund of Ukraine will manage such assets, as well as sell them in accordance with the procedure established by the Cabinet of Ministers. The funds received from the sale will be directed to the Fund for the Liquidation of the Consequences of Armed Aggression.

At the same time, the Cabinet of Ministers may decide to designate another state authority, economic entity of the public sector, military administration as an entity of management of the sanctioned asset. 

Amendments related to the transfer of sanctioned assets to the SPFU management will become effective 3 months after the Law comes into force.

In the management structure of the SPFU

The final version of the draft law retains the provisions on depriving the regional offices of the SPFU of the status of legal entities. They will remain in the structure of the State Property Fund, but such changes will deprive them of some of their powers, in particular, to make decisions and conclude agreements regarding the disposal of state property.

We should note that this is not the first time that regional offices are reorganized. Throughout 2019, on behalf of the government, the SPFU merged 23 regional offices into 11 new structures, with each extending its scope of activities to several oblasts.

The specialized law on the State Property Fund will be partially brought into line with the legislation on the civil service and the organization of the activities of the central executive bodies. It is proposed to introduce the position of the head of the civil service — their functions will be performed by the Chief of Staff of the SPFU. The head will exercise powers on civil service and organization of work of other employees of the Fund, including appointing and dismissing heads of regional offices (representative offices). And all this will take place without the consent of the heads of local state administrations.

Moreover, with the new law, parliamentarians will harmonize the procedure for appointing and dismissing the Head of the SPFU with the requirements of the Constitution. The draft law proposes to remove the head of the Fund from the scope of influence of the President, entrusting the Verkhovna Rada with the powers of their appointment (on the proposal of the Prime Minister) and dismissal — as defined by the Fundamental Law.

The President is also to be deprived of the powers to appoint and dismiss deputy heads of the SPFU; the Head of the SPFU will be entrusted with them.

In terms of guarantees for the protection of the rights of property buyers through electronic auctions

The draft law proposes to amend Art. 388 of the Civil Code of Ukraine to limit the right to claim the property from the bona fide purchaser that was sold to them at an electronic auction held in a two-level electronic trading system on the basis and in the manner prescribed by law.

This change is aimed at protecting buyers of state and municipal property through the Prozorro.Sale system, which today is the only two-level electronic trading system. First of all, we are talking about the purchasers of sanctioned assets, the sale of which will be carried out through the system. Such restrictions are already in force when selling property in the order of privatization or to enforce court decisions.

In the field of privatization and lease of state property

MPs also propose to bring the specialized laws in line with changes in the structure of the Fund — it will become the only state privatization body and lessor of state property (with the exception of cases provided for by the Law “On Lease”).

Draft law No. 8250 will help unblock large-scale privatization. Such objects will not be subject to a simplified list of sale conditions — the buyer will be entrusted with the preservation of the main activities of the enterprise, its modernization, repayment of accounts payable, evaluation and audit, etc. 

Non-market restrictions on the term of lease agreements concluded during martial law can also be canceled. Currently, such a period cannot exceed 12 months after the termination or abolition of martial law. 

In the field of privatization of coal mining enterprises

The draft law improves the approach to the privatization of coal mining enterprises.

• The sale of objects will be conducted through Prozorro.Sale.
• The government will approve the terms of sale of coal mining enterprises and mines, as well as the decision to combine a group of related objects into a pool for further privatization as a separate lot.
• The list of privatization objects will be extended at the expense of economic associations of the fuel and energy complex of Ukraine.

In the field of state property management

The draft law lays the foundation for the creation of an electronic register of state-owned objects, access to which will be provided in the form of open data on the official website of the Fund. An open register of state-owned objects will help establish more effective management of the country’s assets. It will also facilitate the adoption of management decisions on privatization, lease, or concession.

In addition, it is proposed to limit the possibility of electing citizens or residents of the aggressor state, as well as sanctioned persons, as heads or members of supervisory boards of state enterprises and business associations.

Regarding the management of sanctioned assets

First of all, the Cabinet of Ministers still has the authority to designate another body, in addition to the SPFU, to manage a sanctioned asset. The draft law does not detail the timing of the adoption of such a decision by the Cabinet of Ministers — before or after the referral of a court decision to the SPFU for enforcement. This is inconsistent with the fact that the SPFU determines the procedure and methods of enforcement of the court decision, and it is to it that the asset is transferred within 5 days from the date the court decision enters into force.

The draft law does not regulate the issue of transferring the sanctioned assets under ARMA’s management in accordance with the criminal procedural legislation. After all, the sphere of competency of the Agency regarding such assets ends with the court cancelling the seizure of property, its transfer to the ARMA for management, or the asset is sold in the order of its confiscation. Therefore, these issues need to be resolved additionally.

The content of the resolution of the Cabinet of Ministers, which determines the procedure for managing seized assets, including their sale, remains unclear. It is advisable to determine the key points of such important regulatory decisions in the act of the level of law to prevent possible manipulations and corruption risks in their drafting.

In addition, the provisions of the draft law are not entirely consistent with the Law “On the State Budget for 2023.” It determines that the funds received in connection with the enforcement of the Law “On Sanctions” are channelled to the Fund for the Liquidation of the Consequences of Armed Aggression, that is, both the funds directly recovered to the state income and the funds from the sale of recovered assets. While the amendments to the Law “On Sanctions,” provided by the draft law, provide for the allocation solely of the resources received from the sale of assets to the Fund for the Liquidation of the Consequences of Armed Aggression. This aspect will also need to be settled by the government when approving the procedure for managing confiscated assets.

Regarding changes in the management structure of the SPFU

Deprivation of the legal status of regional offices of the SPFU in practice can complicate the operational activities of the agency. All decisions on privatization, lease, management of state property in the regions and related processes (for example, the conclusion of contracts), which were previously made locally, will now fall on the shoulders of the central office. At the same time, the support of such changes by the SPFU indicates the readiness of the agency for such challenges.

Granting the Head of the SPFU the authority to elect deputies may lead to the appointment of loyal persons and, accordingly, the dismissal of “undesirable” ones. However, the features of the procedure for appointing and dismissing deputies are inherent in the central executive bodies with a special status, which the Fund is. This approach is already used in other similar bodies — the NABU, the NACP, and the ARMA. 

Conclusion

By the second reading, the draft law No. 8250 was significantly expanded. It was done mostly due to the necessary and useful changes in the management of sanctioned assets, privatization, lease, and management of state property. 

We do not see significant risks in this legislative initiative, and the reservations we cited can be eliminated at the stage of adoption of by-laws. Therefore, the draft law can be adopted by the Parliament in the second reading and in general.

Author: Andrii Shvadchak, Legal Advisor at Transparency International Ukraine,

Pavlo Demchuk, Legal Advisor at Transparency International Ukraine.

This publication was prepared with the financial support of Sweden.